Although saving for retirement isn’t something on the top 10 list of things you are thinking about in your 20s, it should be. When you are 20-something, retirement seems so far away, you might be living a life where you’ve embraced the term YOLO, or the idea of putting money aside instead of taking part in that epic experience seems asinine.
So why would someone take those first steps in retirement savings before they hit the big 3-0?
Act Before Life Gets Complex
Getting used to the idea of saving for your retirement early enough can make it a habitual, more consistent action that’s taken automatically as the years pass. And although when we are all in our 20s, life seems like it can’t get any busier, it will, and it does. Once you hit 30, you might start settling down, buying a home, starting a family. The list of where income starts going only grows. Having an established savings strategy at that point will make it easier to manage and continue contributions.
It’s all about Compound Interest
The earlier you begin saving, the longer compound interest has time to grow. This is the interest you earn on interest. For example, if $150 goes into your retirement account each year and it earns 5% yearly, you’ll have $157.50 at the end of the first year and $165.38 after the second year, and so on and so forth. The difference of even only a few years can make a huge difference when you look at that same savings at 65.
Take Advantage of Company-Sponsored Retirement Plans
There are more benefits to this strategy than meets the eye. Yes, you will be saving money via a retirement plan, but you also may decrease your annual taxable income. The majority of these plans pull from a pre-tax gross salary unless your contribution goes to a post-tax Roth. So obviously, the lower your taxable income, the less you pay in taxes. When it comes to 401k savings, you won’t pay taxes on that money until you begin to take money out of your account during retirement. Another bonus is that your tax rate at retirement should be lower.
Employer Matching Anyone?
As you continue to contribute to your company’s retirement plan, in time, you might be able to take advantage of the employer matching the contributions you make into your account. Most matching programs call for the employee to contribute a certain amount of their income to receive the matching amount. As you work to reach that point, though, the company might still contribute a certain percentage along the way.
So, the 20-something has been convinced, now what should be considered when investing? It’s always worth seeking out the expertise of a Financial Advisor, but some simple things to consider are:
- Stock Market Risks – The highest rate of return usually comes with the highest level of risk. Take a look at how volatile the stock market can be day-to-day and even hour-to-hour. Stocks are seen as some of the higher risk investments because of this.
- Buffer for Risks – Take your personality into account here. Are you someone who can tolerate high-risk opportunities if they go South? When creating your investment portfolio, take into account not only your financial buffer but your personality.
- Targeted Retirement Age – This should be seen as your ability to rebound if a catastrophic loss occurs. Someone making an investment decision at 25 will most likely go about it differently than a 45-year-old.